Navigating tax disputes with HMRC can be a complex and daunting process. This "need to know" series sheds light on the essential elements. In this note, we cover HMRC's formal information gathering powers.
What formal information gathering powers do HMRC have?
HMRC will typically seek information from the taxpayer informally in the first instance. With informal requests, it may be possible to discuss the contents of the request with HMRC and agree on a sensible approach. HMRC are only able to request information and/or documents which are relevant and reasonably required to check the taxpayer's tax position, and taxpayers should question any requests which do not meet these criteria and/or are too broad.
Taxpayers must provide information or documents which are in their possession or power. Taxpayers are required to make a serious effort to obtain documentation which is not in their possession but may be within their power to obtain from another party, such as a business partner or an accountant.
It is important to engage with HMRC promptly in relation to informal information requests, as failure to comply with an informal information request, without reason, may lead to HMRC using their formal powers under Schedule 36 to issue an information notice.
A Schedule 36 information notice is a compulsory disclosure order which carries financial penalties and must be complied with unless it is successfully appealed to the Tax Tribunal.
There are four kinds of Schedule 36 information notice that HMRC may issue:
- taxpayer notices;
- third party notices;
- financial institution notices; and
- identity unknown notices.
Upon receipt of a notice, it is important to consider the following.
- Whether to appeal: a taxpayer Schedule 36 information notice must be appealed within 30 days.
- Professional advice: consider consulting a legal or tax professional to advise on the implications of the notice and to prepare a response strategy.
- Privilege: as HMRC cannot require a taxpayer to provide legally privileged information, it is important to consider which documents are privileged and to avoid inadvertently waiving privilege.
Understanding notices and related issues
Taxpayer notices
HMRC can issue a Schedule 36 information notice to require a taxpayer to provide information and documents that are reasonably required for the purposes of checking the taxpayer's tax position or for collecting a tax debt of the taxpayer. Whether or not information is "reasonably required" is likely to be the key area of debate with HMRC if you want to appeal the notice.
HMRC do not require approval from the Tribunal to issue these notices, but they can do so if they think it appropriate. In such a case, HMRC will generally make their application to the Tribunal without notice to the taxpayer.
If a taxpayer Schedule 36 information notice has been issued with the approval of the Tribunal, there is no right of appeal. If the taxpayer Schedule 36 information notice has not been issued with the approval of the Tribunal, the taxpayer must put in any appeal within 30 days.
Third party notices
HMRC can require a third party to produce information or to produce a document that is reasonably required for the purposes of checking the tax position of another person. HMRC may send these third party notices to parties who hold information relating to the taxpayer's position, such as trustees or non-legal advisors.
Third party notices must either be consented to by the taxpayer under enquiry or approved by the Tribunal before they can be issued. Once a third party notice has been issued, a copy of the notice must generally be given to the taxpayer.
Third party notices may only be appealed if there has been no Tribunal approval, and even then, only on the basis that the notice would be unduly onerous to comply with.
Financial institution notices
HMRC can also issue a financial institution notice (FIN) to require a financial institution to provide information or documents so that HMRC can check the tax position or collect a tax debt of another person. A FIN does not require approval from the Tribunal or consent from the taxpayer, and there is no right of appeal to the Tribunal.
Identity unknown notices
HMRC may issue an identity unknown notice to a third party requiring information about a taxpayer whose identity is not known to HMRC. HMRC can use this power to request details of a group of persons who can be described, but whose individual identities remain unknown.
The issue of the identity unknown notice must be approved by the Tribunal, unless an exception applies. A third party recipient may appeal but only on the grounds that the request is unduly onerous.
Privileged documents
Privileged documents are excluded from HMRC's information gathering powers. This means that HMRC cannot insist on being provided with legally privileged communications.
A document will be subject to legal advice privilege if it forms confidential communications between lawyers and their clients made for the dominant purpose of seeking or giving legal advice.
There is a formal statutory process for resolving disputes relating to whether or not documents are privileged.
Penalties
If a recipient of a Schedule 36 information notice fails to comply, there will be a penalty of £300, with a daily penalty of up to £60 thereafter until the default exceeds 30 days, when the daily penalty can be up to £1,000.
Providing inaccurate information can lead to a penalty of up to £3,000. In cases of extreme non-compliance the Upper Tribunal may also impose tax-geared penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
